Store closures in the first six months of 2019 exceeded the number of brick-and-mortar stores that closed in all of 2018. In this “retail apocalypse,” overleveraged retailers often struggle to salvage a going concern reorganization or sale. As consumers continue to shift their purchases from brick-and-mortar stores to online retailers, the going concern outlook for many distressed retailers remains bleak. Retailers must act deliberately and early to successfully execute deleveraging going concern transactions.
The successful going concern sale of retailer Things Remembered Inc. showcases the purposeful and constructive approach that must be utilized in large retail bankruptcies. Things Remembered successfully executed a going concern sale by locking up a strategic buyer, incentivizing employees to stay with the company, implementing a flexible sale process, and proceeding through Chapter 11 on an expedited timeline. The company proactively engaged its lenders, the official creditors’ committee, the U.S. Trustee, landlords, and other parties in interest with one particular goal—saving the business, which would maximize value for stakeholders and preserve as many jobs as possible.
Since 2010, a number of macroeconomic factors, including changes in consumer preferences and the shift to online retailers, have contributed to declining sales by traditional retailers. By 2018, these macroeconomic factors and certain microeconomic issues specific to Things Remembered’s business had led to an untenable liquidity situation for the company.
Recognizing that a restructuring transaction was necessary to save the business, the company sought to address its near-term liquidity crunch and quickly initiated discussions with its secured lenders. The company, in consultation with its secured lenders, determined not to repay its revolving credit facility at year-end, providing Things Remembered with sufficient liquidity to fund its restructuring efforts and a potential Chapter 11 filing.
Recognizing the need to explore strategic alternatives, Things Remembered quickly began to canvas the market for a potential going concern buyer. With its advisors, the company contacted 28 potentially interested strategic and financial parties, three of whom ultimately submitted proposals.
The first two proposals only contemplated acquiring the company’s direct business—its e-commerce website and business-to-business operations. Both of these proposals contemplated that all of the company’s approximately 400 stores would close, resulting in large-scale job losses. Things Remembered was unable to reach an agreement with either party sufficient to establish one of them as a stalking horse bidder. The company continued preparations for a Chapter 11 filing, including the possibility of a full-scale liquidation.
In the week leading up to its Chapter 11 filing, Things Remembered received the third proposal, this one from a strategic buyer offering to acquire the direct business, customer data, and as many as 150 profitable stores. The company and its advisors were prepared to quickly negotiate, reach an agreement on material terms and move toward definitive documentation. This flexibility allowed Things Remembered to complete extensive negotiations and due diligence efforts in a compressed time frame. The company ultimately completed its prepetition marketing process in 50 days, resulting in a stalking horse bid that kept stores open and saved hundreds of jobs.
But with an eye on the quickly approaching spring retail season, the strategic buyer premised the deal on completing an in-court sale in 30 days. The buyer had made clear that if it could not capture the sales of the company’s “second season,” which benefited from gift giving around spring weddings, graduations, and religious holidays, the deal was not worth doing. With little margin for error, Things Remembered needed to execute several steps to close the going concern sale. Critically, Things Remembered needed to retain employees, whose skills and knowledge were critical to operating the business as a going concern; maximize asset value; and somehow find more runway to close an asset purchase agreement while on a compressed timeline.
Things Remembered understood that its store footprint was unsustainable in light of its strained liquidity—some stores would have to close. The success of any going concern sale hinged on motivating its employees to stay committed to the business. If the company’s employees left, store performance would deteriorate and buyer interest would fade. Things Remembered, in consultation with its advisors, took several key steps to retain its employees both during the uncertain marketing process before securing a strategic buyer and through the closing of the transaction.
Things Remembered implemented a program to provide severance to employees who were not offered comparable employment by the strategic buyer, which incentivized employees to remain through store closing instead of immediately seeking alternative employment. As part of this severance program, Things Remembered also paid for outplacement services to help employees land on their feet following their termination.
Things Remembered optimized store performance during the store-closing process by continuing to provide commissions and quality bonuses to employees, contingent upon their remaining through store closings. To further incentivize store-level employees, Things Remembered increased wages for hourly employees during the store closing process. Collectively, these actions helped maintain employee loyalty and retention during the store-closing process and maximized the value of closing stores.
Concurrently with its prepetition marketing efforts, Things Remembered conducted an extensive store-by-store performance analysis to determine which stores could be profitable for a going concern buyer. While the company’s buyer was willing to purchase 150 or more stores, it was only obligated to buy approximately 50 stores under the purchase agreement.
Considering the tight timeline to consummate the transaction and maximize the value of going-out-of-business (GOB) sales at the stores, Things Remembered created a novel two-phase GOB process. In the first phase, the company closed stores that were unprofitable in any scenario and which the buyer had no interest in acquiring. The company immediately began the GOB process for these stores, even before filing for Chapter 11,
to maximize their liquidation value.
Things Remembered continued to operate store locations that it had allocated to phase two. This provided additional time for the buyer to evaluate these stores and negotiate rent concessions from landlords. Things Remembered would quickly transition to GOB sales at phase-two stores that were not acquired.
The two-phase GOB sales provided Things Remembered with crucial liquidity during the early stages of its restructuring by promptly liquidating unprofitable stores. But more importantly, it maximized value and saved jobs by allowing more time for the buyer to evaluate whether the remaining stores were viable on a go-forward basis. Things Remembered and the buyer were able to negotiate favorable lease terms with landlords at these second-phase locations thanks to the leverage created by the two-phase GOB process. Ultimately, the buyer purchased approximately 170 stores, far more than it was required to buy under the purchase agreement.
Typically, after a bankruptcy filing, in-court going concern sales require from 45 to 60 days to close to allow bankruptcy judges, the U.S. Trustee, and other stakeholders a period of time to vet potential transactions. Because Things Remembered’s strategic buyer premised the sale on closing the transaction within 30 days, the retailer needed to convince a bankruptcy court judge, as well as its other stakeholders, that this was an appropriate timeline on the first day of the case. If the deal was not closed in 30 days, the buyer could walk.
Things Remembered took several steps to convince the bankruptcy judge and other stakeholders that 30 days was an appropriate timeline in this particular case. The potential going concern sale contemplated the sale of valuable customer data, which typically requires the appointment of a consumer privacy ombudsman in the later stages of a bankruptcy case to evaluate privacy concerns associated with the sale of consumer data. Because Things Remembered could not afford to have the sale delayed, the company gave advance notice of the need to appoint a consumer privacy ombudsman and proactively requested that the judge appoint one on the first day of the case.
Things Remembered also engaged the U.S. Trustee, who courts heavily rely on to vet a debtor’s compliance with the Bankruptcy Code, before the petition date to stress the importance of quickly consummating the transaction, considering the unique risk to the business. Ultimately, Things Remembered’s purposeful actions provided the time and transparency needed for the U.S. Trustee to support this novel first day relief.
Another strategically important step was the prepetition marketing process. Things Remembered conducted a robust prepetition marketing process prior to filing for Chapter 11, so it was well-positioned to address inevitable concerns about a short in-court process. As further support, Things Remembered and its investment bankers filed numerous declarations that detailed the holistic and comprehensive marketing process and emphasized that the proposed transaction was the best possible deal.
Critically, Things Remembered also acknowledged the importance of the creditors’ committee’s support, including the positive signal such support sends. Mere hours after the newly formed creditors’ committee retained professionals, Things Remembered signaled its commitment to collaboration by opening a dialogue, providing detailed diligence packages, and scheduling weekend calls. These deliberate efforts helped the committee understand the benefits of the expedited going concern sale and ultimately led to the full support of the creditors’ committee.
Due to their extensive retail experience, Delaware bankruptcy judges understand how rare it is for a debtor, stalking horse bidder, U.S. Trustee, unsecured creditors’ committee, and secured lender group to line up in support of a shortened sale timeline. This consensual alignment was attributable to Things Remembered’s proactive collaboration with its stakeholders and full transparency with all parties involved.
To consummate a transaction with such speed and in such an uncertain operating environment, a company cannot lose sight of process and closure.
Process. Things Remembered appointed a special committee of independent directors to act on behalf of the board to review and explore potential restructuring alternatives. The disinterested special committee played an integral role in the restructuring—overseeing and directing the sales process. Importantly, the appointment of the special committee insulated the transaction from potential attacks (e.g., that the transaction unfairly benefited insiders).
Specifically, the special committee helped Things Remember evaluate its other directors for any potential conflicts of interest. Only the special committee and directors who the special committee determined did not have conflicts of interest participated in deliberations and decisions related to the going concern sale. The three independent directors of the special committee were also able to provide unbiased insight regarding strategy and decisions. Particular decisions, such as how Things Remembered created additional time to negotiate the transaction using the two-phase GOB sales process while simultaneously shortening the overall sale timeline, were guided by independent director oversight.
Closure. The Bankruptcy Code creates broad guidelines for debtors to engage with stakeholders and form consensus around the appropriate path forward. In Things Remembered’s case, the company implemented a plan of liquidation, rather than a structured dismissal, to distribute sales proceeds and pay administrative claims. The company was able to demonstrate to its lenders that a Chapter 11 plan could be confirmed quickly and without added expense. The company’s consensual plan of liquidation also included comprehensive mutual releases, bringing complete closure to the Chapter 11 cases in the manner contemplated by the Bankruptcy Code.
The odds did not favor Things Remembered on the eve of its Chapter 11 filing. Thanks to the collaborative efforts of its stakeholders and the U.S. Bankruptcy Court for the District of Delaware, Things Remembered’s sale was approved and closed by March 8, 2019—only 30 days after the retailer’s bankruptcy filing. Since the court confirmed the Chapter 11 plan on June 12, 2019, the estate has distributed millions of dollars to creditors, paid necessary administrative claims, and granted full releases to parties, bringing full closure to the Chapter 11 cases.
Because the Chapter 11 process worked as intended and Things Remembered took purposeful action to avail itself of that process, there are still hundreds of Things Remembered stores operating across the country and, most importantly, thousands of employees with jobs at the retailer.